威騰電子 (WDC) 2007 Q3 法說會逐字稿

Good afternoon, and thank you for standing by.

Welcome to Western Digital's third quarter financial results for fiscal year 2007.

Presently all participants are on a listen-only mode.

Later we will conduct a question and answer session.

(OPERATOR INSTRUCTIONS) As a reminder, this call is being recorded.

Now, I will turn the call over to Mr.

Bob Blair.

Thank you, you may begin.

Thank you.

As we begin, I want to remind you we will be making forward-looking statements in our comments and in response to your questions concerning our expectations regarding supply and command conditions in the hard drive industry, our beliefs regarding growth opportunities for hard drives, our continued outstanding returns on investment, and our ability to be a market leader in the data storage industry.

Also our business and market expansion strategies, our plans to continue investing in future technologies and product platform to broaden and grow our product portfolio, affects the seasonality (inaudible - background noise) capital expenditure, plans for fiscal 2007, and our current financial outlook for revenue, gross margin, operating expenses, earnings per share, and other key metrics.

These forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that could cause actual results to differ materially, including those listed in our form 10-Q filed with the SEC on February 7th, 2007, as well as the additional risk factors reported in the Press Release included as Exhibit 99.1 to the Form 8K we furnished to the SEC today.

We undertake no obligation to update our forward-looking statements to reflect new information or events, and you should not assume later in the quarter that the comments we make today are still valid.

I will now turn the call over to President and Chief Executive Officer, John Coyne.

John?

Thanks, Bob.

Good afternoon, everyone.

Joining me today is Steve Milligin, Chief Financial Officer.

After my remarks and Steve's financial report and outlook, we'll be happy to answer your questions.

Before a discussion of our financial performance, I want to cover our additional news today of a transition in Chief Financial Officers at WD.

A change that will takes place over the next several months.

Tim Leyden, who worked at WD from 1983 to 2000, is return to go the Company on May 7th as Executive Vice President of Finance.

Tim will become CFO on September 1st, succeeding Steve Milligan.

In the transition period, Tim will report to Steve.

I want to acknowledge Steve's outstanding performance and contributions over the last three years as CFO, and as leader of our strong financial organization.

On behalf of the WD team and our Board of Directors, I wish Steve all the best in his future endeavors, thank him for an outstanding job, and for his assistance during the upcoming transition.

Tim Leyden and I started our careers at Western Digital together in 1983, opening a board manufacturing facility in our native Ireland.

Subsequently, we were part of the acquisition and transition team when WD entered the hard drive business in the late 1980's, with operations in Singapore.

In his subsequent years at WD, Tim held a variety of increasingly responsible positions in finance, operations, and IT.

I'm very pleased to welcome Tim back to WD as a long-time trusted advisor.

His deep knowledge and experience in the storage controller, semiconductor, and hard drive businesses will be invaluable as we address the multiple opportunities available to WD in this great industry.

Now, let me move onto the current business report.

In light of the seasonal dynamics in the March quarter, I think it is important for all of us to take a step back and consider the strong, long-term fundamentals of this business.

Applications for hard drives continue to expand in multiple growth markets, with an increasingly diversified customer base.

Digital content requiring storage and retrieval is expanding in both the commercial and consumer segments.

The value proposition of hard drives continues to provide compelling advantages, for traditional computing applications, as well as for growing high volume consumer applications.

CE requires significant storage of personal digital content, either to serve the surging growth of handheld devices, or to securely store video, photos, and audio content in reliable, home-based appliances.

Our industry's newest technologies are being deployed and embraced by customers.

There are now fewer players in the industry, but it continues to be competitive.

So it' up to each of us to develop unique product strategies, cost structures, and business models that allow us to compete effectively.

In summary, the hard drive industry continues to offer compelling growth opportunities and strong potential for continued outstanding returns on investment.

Having said that, we are in the midst of the industry's traditional low season of the March and June quarters.

In the last quarter, we faced seasonally slower demand and competitive pricing, with both coming in at the challenging end of normal trends.

Against this background, I am pleased to report WD financial performance which reflects our consistent execution to a business model that allows to us manage through the wide range of market conditions.

WD's high velocity model enables us to adjust quickly within a quarter as market challenges and opportunities emerge.

This was the case in March as we saw changing demand and pricing patterns, and made adjustments to produce solid financial results.

We delivered net income and revenue at the high-end of guidance and generated strong cash flow.

Our gross margin was lower than forecasted, but within our long-stated business model range of 15% to 20%.

We continue to compete for business on the basis of the quality, reliability, and availability of our products, and on our ability to respond quickly and flexibly to customer's needs.

We are gratified that our customers continue to embrace this WD value proposition, as reflected in the sustained growth of our business.

I want to acknowledge the passion, productivity, and perseverance demonstrated by WD employees in producing our Q3 results, and the loyalty and dedication of our supply partners in working with WD to fulfill our demanding requirements and those of our customers.

There were several noteworthy highlights and developments in the quarter.

Overall, we continued to diversify into the industry's faster-growing markets, with 47% of revenue coming from these newer markets; a 5-point increase quarter-over-quarter, and an 18-point increase year-over-year.

The desktop market was at the lower end of seasonal demand trends.

We nevertheless executed strongly in this space with shipments up year-over-year.

In notebook, we continued to expand our customer base and increased our penetration at existing accounts, shipping 3.7 million drives.

In branded products, we demonstrated continued momentum based on our strong product lineup, expanding global footprint, and increasing consumer awareness of the need and value of securely transporting and storing personal digital content.

We began shipments of the one-terabyte My Book World Edition, part of a family of shared storage appliances that allows for secure mode access and sharing of content.

In consumer electronics, we launched a new family of WD AV branded hard drives, featuring new technologies that increase reliability and offer cooler and quieter operation with lower power consumption.

Our CE unit shipments were down slightly in the March quarter, reflecting the normal seasonality of the consumer based segment of the DVR market.

In enterprise, we continued to grow shipments of our unique 10,000 RPM WD Raptor drives and our 7200 RPM WD RE drives for near line storage applications.

These achievements and initiatives reflect a healthy return on our significant, ongoing investments in people, technologies, products, and the infrastructure to grow our business.

Steve Milligan will now cover the Q3 financials and the outlook for the June quarter.

Steve?

Thanks, John.

WD's flexible business model and strong execution enabled the Company to deliver solid financial results.

Revenue for the third fiscal quarter was $1.4 billion, and unit shipments totaled 24.5 million, increasing by 25% and 30%, respectively, from the prior year.

Average selling prices were approximately $58 per unit, flat with the December quarter.

We shipped 3.7 million 2.5-inch mobile drives in the March quarter, as compared to 2.7 in the December quarter, and 1.4 million in the year ago quarter.

Our growth in this important high volume market demonstrates a broadening acceptance of our products with notebook PC OEMs.

Turning to consumer electronics, we shipped approximately 2.6 million units for use in digital video recorders in the March quarter, versus 2.7 million in the December quarter, and 1.7 million in the year ago quarter.

Revenue by channel was 47% OEM, 34% distribution, and 19% branded products, versus 46% OEM, 37% distribution, and 17% branded products for the December quarter.

No customer represented greater than 10% of our revenue for the quarter.

The Q3 geographic split of our business was 36% Americas, 29% Europe, and 35% Asia, as compared to 38% Americas, 32% Europe, and 30% Asia in the December quarter.

Our gross margin percentage for the quarter was 15.8%, versus 17.9% in the December quarter, reflecting a particularly competitive pricing environment in the notebook, desktop, and consumer electronics segments.

Operating expenses totaled $107 million, which is net of a $13 million recovery related to a receivable previously deemed uncollectible.

Operating income was $115 million, or 8.2% of revenue.

Net interest and other income totaled approximately $7 million.

Income tax expense was $1.3 million for the March quarter.

For the full year, we currently expect our tax rate to approximate 2%.

Net income totaled $121 million, or $0.53 per share.

Turning to the balance sheet, our cash and short-term investments at the end of the quarter totaled $875 million, an increase of $45 million from the December quarter.

Cash generated from operations during the quarter totaled $164 million.

Capital expenditures for the quarter were $70 million.

Noncash charges for depreciation and amortization expense totaled $55 million.

Capital additions for fiscal 2007 are currently expected to approximate $400 million as we continue to invest in advanced head technologies, new product platforms, and capacity for our broadening and growing product portfolio.

Depreciation and amortization expense for fiscal 2007 is expected to approximate $210 million.

We repurchased 1.5 million shares of stock during the March quarter for approximately $29 million.

Since May, 2004, we have repurchased 11.7 million shares at a total cost of $143 million.

A total of $107 million remains under our existing stock repurchase authorization.

Additionally, during the quarter we paid off the balance of our existing bank debt totaling $19 million.

Our cash conversion cycle for the quarter was zero days, consisting of 46 days of receivables, 19 days of inventory, or 19.6 turns, and 65 days of payables outstanding.

That was a look back at our third quarter.

Now I will move onto our expectations for the fourth quarter of 2007.

We expect demand for the June quarter to be seasonally soft.

Accordingly, we estimate revenue for the June quarter to be between $1.3 billion and $1.35 billion.

Gross margin percentage for the June quarter is anticipated to be roughly 15% given typical seasonal factors.

Operating expenses are projected to be approximately $124 million.

Interest income should exceed tax expense by about $4 million, and our share count is expected to remain roughly flat.

Accordingly, we estimate earnings per share of between $0.34 and $0.38 for the June quarter.

I will now turn the call back over to John for questions.

Thank you, Steve.

Operator, we're now ready for questions.

Thank you.

Ladies and gentlemen, we will now begin the question and answer portion of today's call.

(OPERATOR INSTRUCTIONS) One moment, please, for the first question.

Aaron Rakers, your line is open.

Please state your company name.

Yes, Aaron Rakers, A.

G.

Edwards.

Thank you very much.

I guess the first question is on the inventory, the weeks of inventory in the distribution channel and the desktop, and then also if I could ask to follow up on that, what does the gross margin trend look like on the notebook business now?

I guess looking at 15.7%, I guess it would be helpful to understand where the difference came from versus your prior expectation of roughly 17%?

Sure.

Aaron, relative to weeks of inventory in the distribution channel, our sales in the industry are under six weeks at the end of the quarter, so pretty good shape there.

Regarding notebook margins, they were flat quarter-on-quarter relative to how that impacted our expectations coming into the quarter, on a margin percentage standpoint is pretty consistent, I think from a volume perspective we did a bit better than what we expected coming into it when we had our original guidance.

So from a mixed perspective, it impacted our margins negatively in that sense.

And I guess if you could also provide an update with regard to where we're at with PMR, a level of shipments right now, as well as an update on your 160 gigabytes per platter of ramp?

This is John.

We don't normally break out details such as that which we consider competitively proprietary.

Technology transitions are a part of this industry, on an ongoing basis.

They're one of the many levers that we pull to manage the business.

We are doing well on our progress, both in our PMR transition which is in our 2.5-inch space today, and our transition to 160 gig per platter.

I am pleased with the progress that the teams are making in both of those transitions.

We continue to manage that in a controlled way to ensure that we have the right products to offer to our customers in terms of reliability, capacity points, functionality to address all of the market opportunities.

And we're managing that in the context of our overall business model, and you will see the results of that in the results we just declared and the forward-looking guidance that we've given you for the current quarter.

And then final question for me and then I will seat the floor.

Looking at your operating expense management, quite impressive in the quarter, most notably on the SG&A side.

Maybe you can help us understand towards the latter part of the quarter what really you were able to do to bring down that SG&A cost quite materially?

Sure, Aaron, one of the things we talked about in the past is that a fair amount of the compensation that we have is variable or at risk, and one of the things that we -- we do that intentionally because we know that there can be volatility in the gross margin line item in this business, and so what we -- we have six-month incentive compensation programs, so for the back half of the year, given our margin pressures we're seeing in the gross margin area, basically, have a lower variable compensation component in that just from a performance perspective.

Thank you very much.

David Bailey, you may ask your question, and please state your company name.

Sure, great.

Thank you.

Goldman Sachs.

Can you talk a little bit about the drivers behind branded being up again in the March quarter, and what you think your weeks of inventory are in retail right now versus the channel?

Certainly I can address the drivers.

What we're seeing is a significant realization in the consumer base that the emotional content, if I call it that, photographs, music, videos, lots of personal content that needs to be securely stored.

We're also seeing significant demand in the transport of, typically of commercial information in a secure way, and so both of those are the drivers for significant demand in the branded products arena.

We have also two other elements influencing our success in that area.

One is the excellent product line that we've developed, and the second is the breadth of our footprint in distribution channels on a global basis.

Steve will address the inventory question.

Yes, David, on the weeks of inventory in the retail, when I talk about weeks of inventory in total, that includes retail.

Typically we don't disclose the retail components separately, but that business usually has a little bit more inventory in the channel, just given the nature of the beast, but that's business as usual.

And I can tell you that actually what I think is a very important data point is that in the fiscal third quarter, we actually sold out more inventory than we sold in in the retail channel.

Okay.

And also on go-forward pricing expectations relative to normal declines, can you give us a general idea across each of the product lines?

I'm sorry.

Can you repeat that, David?

Yes, the go-forward pricing expectations for the June quarter versus normal declines?

We're expecting seasonal price declines in the June quarter, so nothing outside of the normal boundaries of what we would see in the June quarter.

So in some ways a little bit better than this quarter?

Possibly, possibly.

I think we'll have to see.

It's early days, obviously, still in the quarter, but I think you're probably accurate in terms of just from a pure assumption perspective.

Okay.

Great.

Thank you.

Because March, as you know, is a little bit at the worst end of typical pricing.

Okay.

Thank you.

Thank you.

Harry Blount, your line is open.

Please state your company name.

Hi.

Lehman Brothers.

A couple things.

One is just, Steve, I wanted to clarify something you said on the variable comp.

Was there actually a reversal then in the variable comp?

No.

So okay, no reversal from the accruals from the prior quarters?

We have six-month programs, so the accruals that we made for the first half of the year were paid out.

Got it.

Okay?

And then we have new programs starting in the second half of the year.

Got it.

Okay.

What it is is just that the level of accrual was lower because our performance was from a margin perspective was different, but there is no reversal or anything like that.

Okay.

How significant was that?

Well, you can see how much we were off from our guidance.

Our original guidance was 126 million, if you normalize for the ESIS it was 120, and so the majority of that is kind of in that area, but there's some other puts and takes, but that's the majority of it.

Got it.

And then the announcement of Phelps and TDK are planning to merge operations.

How do you guys expect that to impact you, assuming that goes through.

As you know, Harry, we have a model which is a dual source model, internal and merchant market, with the majority of our head supply being satisfied from our internal resources.

We intend to continue that model.

We have very good relationships with both SAE, TDK, and ALPS.

We're working good with both of them to ensure that we have a seamless transition here as TDK pick up the ALPs' head related assets.

So our business model remains the same, and very cordial relations with SAE, and we've together, I believe, we clearly understand what's required to be competitive in this space.

Got it.

And then lastly, I believe you guys mentioned that you had no 10% customers in the quarter.

Was wondering that seems to imply based on rough math that Dell was down meaningfully sequentially.

Can you maybe shed a little bit more light on was that a situation where you lost share within the account, or was there some other factors that played a role here?

I am not sure that that's necessary, the math, Harry, the other way of having no greater than 10% customer is to increase business with others.

Okay.

But could you maybe clarify --

I think, Harry, it is just a matter of that particular customer having a weaker quarter, which obviously, has been fairly well documented.

It had nothing to do with our allocation or position with that particular customer.

Got it.

Okay.

Thanks.

Paul Mansky, your line is open.

Please state your company name.

Good morning.

Actually this is Chris Warner for Paul.

Just had a couple of questions.

In regards to pricing, was any segment worse than the other in terms of desktop versus notebook versus CE in the quarter?

I think we indicated that -- Steve in his remarks indicated that we saw a very competitive activity in the desktop, in notebook, and in CE.

That's the DVR segment of CE that we service.

I think that the one that is, has been for some time and continues to be extremely competitive is the 2.5-inch notebook space, where we have six suppliers and the customer base is using that to their advantage right now.

Then in terms of mix on desktop, did you see any shift more towards the mature products or higher capacity, or how was your mix in the quarter?

On the mix, I think our -- as I look at the mix relative to the overall industry mix, we're pretty representative in terms of our share of capacity points.

And the mix up for the quarter was within line -- was in line with seasonal norms for fiscal Q3.

Okay.

That's my last one.

In terms of your branded business, seems like Seagate is making a pretty strong push with the free agent drive in the last month or so.

Have you seen any increased pressure, pricing pressure there from a shelf -- market shelf standpoint?

Have you any negative impact from that?

I think that the branded products arena, like all elements of the drive business, tends to be competitive.

We would note that a significant amount of our gains over the last year have been more at the expense of the smaller regional players in this space, rather than the large branded companies.

Great.

Thanks.

Christian Schwab, your line is open.

Please state your company name.

Great.

Guys, what -- did you say when the 160 gigabyte single platter drive is coming?

It is already shipping in volume.

Shipping in volume?

So as that becomes a more material part of your mix, how does that positively impact gross margins?

I mean, should we be thinking about when we get into the second half of the year, and we actually have volume and seasonality on our side, and our ability to also mix up capacities also on our side, and can you help us gauge?

Should pricing just follow typical seasonal declines on a like for like basis for the next three quarters where we could exit on gross margins, John?

Yes.

I think the thing to bear in mind about aerial density progress, which PMR is just one manifestation of that continuous progression in aerial density that we've been doing in this industry for many, many years.

And it is a fundamental element that really each progression in aerial density enables a new capacity point that we've never been able to reach before, and that opens up new applications for high capacity storage.

The other attribute of aerial density progression is that we're able to deliver significantly more capacity, let's say on a single disk machine, than we were previously able to deliver, and as that technology matures, we deliver that incremental capacity at the same price point that was previously on that single disk platform.

That kind of value proposition for storage customer is what's created this $30 million, 400 million-plus unit business with all of the myriad application for merging, for hard drive storage.

So typically we attempt to stay within our margin model range while providing that value to the customer base to grow the market opportunity.

Then relative to seasonality, we certainly expect the second half of the year to be seasonally strong, and we would expect to see the same kind of patterns looking forward as we've seen in the past, relative to margins versus seasonality.

Let me try one more time.

If we're going to take out a $5 platter and some $4 heads and some buck suspensions, we're going to save a lot in cogs.

So I would assume that your gross margins should improve as your desktop volume becomes disproportionately shipped to at 160 versus 80, even with the huge pricing concessions you've been getting out of your component base for them supplying you mature products.

So I guess I am trying to -- I don't need you to give me an exact number.

I guess directionally, are we wrong to assume that gross margins, in fact, should not improve in the second half of the year based on demand mix-up and your ability to take components out of the majority of your drives you're going to ship?

I think it is reasonable to expect that we plan to run the business like we've been running it for many years.

And typically you see a seasonal uptick in the back half of the year, and aerial density progress is always with us.

And as we execute these transitions, we typically get advantage over time on the cost side, and we typically grow the market by sharing some of that with our customer base in terms of value.

So there is no silver bullet that's going to change the characteristics of the industry.

We're not going to stand still in terms of reaping all of that benefit into the gross margin model at the expense of continued progress.

So we're happy with our model in the 15 to 20 point range, and we will manage within that range to continue to grow the business.

One last question, if I may, what was your mix?

What percentage of your 3.5-inch drives did you ship based on the 160 gigabyte single platter solution, and where would you expect that to exit the year?

Can you give us any color there?

We don't typically give that kind of granularity.

We consider that highly proprietary competitive information.

Thank you.

Thank you.

Mark Miller, you may ask your question.

Please state your company name.

It's Brean Murray.

I'm just trying to understand, Seagate reported there was weakness in the multi-platter 3.5-inch product segment this quarter, or in the March quarter, and I am just wondering you said it was seasonal.

Does that mean weakness or things were better for you than Seagate, do you feel?

Mark, just to clarify that, when I was talking about seasonal, I might not have said it correctly.

But we're expecting seasonal price declines in fiscal Q4, fiscal Q3 was at the high-end of seasonal price declines.

Okay.

I guess the question --

What we're saying, Mark, is the same thing that Seagate said.

We don't have a different view on that.

Okay.

Thank you.

So my feeling from listening to you guys, that I guess the key question on everybody's mind is, are the declines we're seeing in the coming June quarter anything more than seasonal?

Is there something bigger happening here like a fundamental fall off in demand, or are we entering an extended regime of high priced competition.

Let me try and tackle that.

I think relative to the seasonal demand comment where we did say that Q3 was at the challenging end of seasonal demand, I think there are perhaps two factors that played into that.

One was the AMD Intel price cuts that were well signaled for the April period, which had a somewhat chilling effect in late March, and the other is that if you cast your mind back to 2004/2005 December quarters, in both of those quarters, the industry was media constrained.

And so there was, to some extent, a pent up demand overflow into the March quarter in 2005/2006.

In the 2006 December quarter, there was no constraint relative to media availability or any other component of significance, so I think perhaps a little bit of pent-up overflow in the last two years is also an influence on the seasonal shape of this March quarter.

And finally, just any comments you can provide, please, about the head purchases externally in March quarter, the June quarter and the mix?

Any changes from normal?

Are you still within your normal percentage of purchases?

Are you buying more of higher end heads in the June quarter than you have traditionally?

No.

We're pretty much tracking over the last several quarters within our model, which as we've indicated to you, is 70% to 80% internal, and that's pretty consistent through the last couple of quarters and outward into Q4.

So there's no mix change roughly?

Not significant.

Thank you.

Steven Fox, your line is open.

Please state your company name.

Hi.

Merrill Lynch.

Just curious as to the capital spending outlook.

Seagate recently cut their numbers slightly by about 5% or 10%, and was wondering how you balance that against a risk of coming off of a lower base during this seasonally slow period, and what that says about your expectations for the lift later in the year.

Sure.

Our capital spending plans for this fiscal year, we expect to add $400 million of capital.

That number has not changed.

Right.

I think that -- our volume expectations kind of overall, although there was some weakness in different parts, but it has not changed significantly.

And we've always had a pretty flexible model in terms of when we add capital and only doing that when we see the need for it from a volume perspective, and so we're at this point not expecting any significant changes to our plans.

Okay.

Then you mentioned that there were no -- within desktop, there was no major changes in mix relative to seasonality.

Was there any other mix issues that were abnormal during the quarter, just to round that discussion out?

No, not really.

The only thing is is that we -- our mobile business was a little bit stronger from a unit perspective than what we maybe thought going into the quarter, but beyond that, everything else was pretty similar from a mix perspective.

Great.

Thank you.

Matt Kather, your line is open.

Please state your company name.

WR Hambrecht.

Can you guys comment on your uptick in mobile unit sales?

Do you think you've gained market share in that segment, or how do you feel your market share was in both the mobile and desktop in the quarter?

Well, in our world market share is a result.

I think that the mobile performance was driven by two major elements.

One was an increase in the number of customers that we're serving, and the other was increased orders from several of the customers that we had previously been serving.

And our view of that is that the value proposition WD offers in terms of quality and reliability and availability is what's earning us that business.

It seems like you did gain some market share then.

[ MULTIPLE SPEAKERS ]

-- but I don't think there was significant changes in market share in the desktop space, period.

Okay.

Maybe if we could go to a new topic and DVRs.

Seagate mentioned they saw some weaker than expected demand due to programs running off, et cetera, in the March quarter, and certainly in June coming up on a standard change for some of the cable providers, cable and satellite providers.

Do you think going into June that this could be a head wind, or is it an opportunity for your business?

Well, I think as we commented, we did 2.6 million in the March quarter versus 2.7 in the prior quarter, which is pretty much in the seasonal pattern, so no surprises there for us.

The cable change, which affects the U.S.

market only, is causing a little bit of time shifted demand which is positive.

And then it is a business that's characterized by project based builds, so it tends to be a little bit choppy, around about a fairly predictable year-over-year type growth pattern, but within quarters it can be a little unpredictable.

Okay.

Maybe on the enterprise side, obviously you guys like to announce products only when you're shipping, but that's an exciting area for you guys to ramp from a small base.

Do you have any updates on maybe not specific wins, but maybe some momentum that you might have in that area?

No specific product announcements.

We are continuing to make good progress in this area.

I think the near line storage which -- into which we ship our late addition products is a fast-growing area, and we've been very successful in that space.

We're also pleased with sales of our 10-K RPM satellite product, the WD Raptor line which tends to be incorporated in high-end workstations and servers, so we're pretty pleased with our progress so far in that marketplace.

Okay.

Thank you.

Thank you.

(Operator Instructions) Sherri Scribner, your line is open.

Please state your company line.

Hi.

Thank you.

It's Deutsche Bank.

I just wanted to probe the gross margin numbers this quarter a little bit.

I think you said your mobile margins were about flat with last quarter, and it sounds like that mix was a negative drag on your gross margins.

So if I put that together, it looks like your desktop margins were down a little more than 2 percentage points Q over Q.

Can you give us some sense of where you're seeing the impact to margins?

Is it from higher costs of components?

Is it a mix issue?

Is it aggressive pricing?

Can you help us there with gross margin number?

Sure, Sherri.

The primary impact on our gross margins quarter-on-quarter and versus our guidance was that price declines were steeper than what we expected.

Okay.

That was the big driver.

So you're not seeing any impact from higher component costs as you're maybe doing more perpendicular or anything like that?

No.

If you look at our cost declines compared to history and that sort of thing and what a reasonable cost declines, really we saw cost declines in line with what we would normally expect and in line with that, but we just -- we as an industry, from a competitive standpoint, gave away too much in price, and it impacted our margins.

Okay.

Great.

And then the 13 million benefit, I am assuming that's in SG&A, is that right?

That's correct.

Okay.

And then in terms of the slowdown in March, was that something you saw on the OEM side, or is it something you saw in DISTE?

I think we saw it in both, and we reacted to it and managed our bill plan and our OpEx structure.

Okay.

All right.

Thank you very much.

Thank you.

Jesse Tortora, you may ask your question.

Please state your company name.

Hi, guys.

It's Jesse from Prudential.

DSOs were up four days sequentially and eight year-on-year.

Can you give us the reason for that, any more detail around that?

Sure.

Relative to the year-on-year statement, there are a few things going on there.

We have had some changes in payment terms with some customers that have driven that.

The other thing is is that the retail business is a little bit slower paying, so as that's increased as a percentage of our business, it has been a drag on our DSOs.

And the last thing which also impacted things on a quarter-on-quarter basis is that, and this is a relative statement, linearity was a little worse than we normally had seen.

So we sold a little more towards the back end half of the quarter than what we would typically do in a March quarter.

Those are the drivers for our DSO.

Okay.

And can you provide us with some more detail around the receivable recovery and where it actually shows up on the P&L?

The benefit of that recovery is in SG&A.

Okay.

And can you give us more detail on what that was actually?

Well, we had a customer that had simplistically run out of funding.

We took a reserve for it, given that they were essentially, quote, out of money last quarter.

They received funding in this past quarter and paid us for that.

Our receivable balance and we were able to recover that what we thought might be a bad debt.

Got it.

We did not disclose and are not intending to disclose the customer.

Okay.

Finally, if your channel inventories and the industry's were less than six weeks, Seagate is less than five, can we infer that the other two desktop players were somewhat higher than the six-week model to make math work?

The problem you run into, Jesse, is we all calculate -- well, at least there is only two public companies left in the drive industry, but we calculate it on different basis.

We use a four-week trailing average to calculate weeks of inventory and Seagate uses 13 weeks.

So you get into -- it is a bit of an apples and oranges comparison.

Got it.

Okay.

Thanks, guys.

Thank you.

Our last question comes from Harry Blount.

Your line is open.

Please state your company name.

Hi.

Lehman Brothers.

Just a quick clarification.

I think you guys have in the past disclosed percent of revenue from top 10 customers.

Do you have that data plan?

I don't see it in the metric page.

I indicated in my remarks, Harry, we did not have a greater than 10% customer.

No, but you had a -- you guys normally disclose something -- [ MULTIPLE SPEAKERS ]

I am sorry I misinterpreted the question.

I don't know.

I don't have that answer, Harry.

On the metrics page.

Yes, I don't see it there.

Okay.

We didn't provide that.

Okay.

Thanks.

I would now like to turn the call over to Mr.

John Coyne.

I would like to thank all of you for joining us today.

We're very excited about the growth opportunities in the data storage industry, and about WD's ability to participate in this market as one of the leaders in the years ahead.

We look forward to updating you our progress.

Thank you.

Thank you.

This does conclude the conference call.

You may disconnect at this time.